A cynical commentary about developments in the South African financial markets and the incomprehensible activities and pronouncements of bureaucrats and politicians.

Friday, 22 January 2016

RAIN AND SNOW

Number One, plus a pretty large
retinue of countrymen and women, were in Davos this week to show off their
sponsored fur-lined clothing selections. It is doubtful if any of our official
delegates at this annual World Economic Forum were able to make many useful
contributions to the theme of this year’s jamboree which is “The Fourth
Industrial Revolution”. It’s not at all certain that we down here on the
southern tip have even completed the first three.

Somehow JZ must have dodged his
minders and managed to seize a microphone and podium to assure everyone that
the South African economy was not only open for business but was also
“resilient”. His understanding of that word seems to be in the same league as
his command of large numbers and commodity price drivers. Poor. Most talking
heads think that our sad drought-stricken country will fail to grow by even 1%
this year. Although great rains are forecast to arrive soon, it’s already too
late for grain harvests and prices of most foodstuffs are setting all-time
highs.

What undoubtedly will not be
poor, however, is the catering arrangements at the parties which take place as
a reward for attending the conference sessions. Squadrons of economists,
politicians and head honchos take it in turns to show off their Power Point
skills and score points for how many in the audience stay awake. The talking
heads stand in the snow and ask silly questions in front of the cameras. The
real story at Davos is networking to Olympic standards.

It is doubtful that any of our
financial markets have reached their nadir yet. That is the rand can still
weaken further, share prices can fall lots more and interest rates are certain
to rise. The few special situations like the Breweries deal do provide the odd
spark of light halfway down the tunnel but it looks as if the All Share index
is headed for a really bad monthly decline of well below -5%. Several sectorial
indices are already into double digit declines. Fairly shortly the December
year end companies will start to publish their results and the extent of the
damage will become clearer. Already the aggregate price earnings ratio of the
100 largest market cap shares on the JSE has fallen to around 13. A decline in
earnings of only 10% by most of those companies could see that ratio fall to
single figures – a much more interesting level for buyers.

A consequence of the very weak
currency is that the rand value of offshore held assets has grown pleasingly.
This is exactly what a rand-hedge strategy is designed to achieve. However,
this means that the percentage of offshore assets compared to total portfolio
value can exceed the limits imposed by the Reserve Bank’s foreign exchange
department. The sole but alarming remedy would be to sell offshore assets and
repatriate rands – a process which seriously prejudices the local portfolio
owner’s interests. This is a development to watch and those managers with
capacity for further offshore investment could well see inflows.

Just three weeks into the year
it is very dispiriting to be a South African sports fan. Without saying another
word about the cricket where only the politicians could be satisfied with their
efforts, even the forthcoming Super Rugby season looks bleak. Not least of all
is the uncomfortable conference structure foisted upon us as a result of both
New Zealand and Australia telling the suits to leave them alone and billet the
Japanese and Argentinians elsewhere. And there’s a different bonus point system
to be implemented this year. Add to this the fresh claims for the disappointing
but somehow inevitable revelation that no sport is immune to financial
inducement for a particular outcome. Perhaps even the women’s Beach Volley-Ball
at Rio will be rigged. But I have no idea where they tuck their bribe money.